LLC's (Limited Liability Company) is by far one of the most common and recommended entities to incorporate as. Although as I've mentioned before choosing an entity is not a one-size fit all selection and when you are faced with this decision you should consult with a qualified Business Consultant (hi!), lawyer or accountant to ensure you are making the best choice for YOU and YOUR business.
An LLC limits your personal liability as a business owner (LLC owners are actually called members) as you and your business are independent of each other. The structure protects your personal assets such as your home, retirement accounts, land, cars and if the business has to file bankruptcy, your personal assets are not at risk, and much more should your business be sued for any reason.
There are a few exceptions to this, let's say you obtain a business loan from a financial institution, you will have to PERSONALLY guarantee that loan and therefore if you default on that loan you are personally liable. And should you not make a clear effort to keep you and your business independent of you the courts may allow your personal assets to be at risk. Some examples are, co-mingling funds - and not only in the sense that sometimes you use your business funds for personal items, but as an LLC you are legally required to hold your business funds in a separate business bank account. Not obtaining or staying current with the appropriate legal requirements, having mistakes/errors/omissions written in your Articles of Incorporation/Bylaws/Operating Agreement and not clearly making it known that you are an LLC. (I will touch on the requirements of when/where you need to make it clear you are an LLC in a follow-up post)
In the event of a lawsuit, the Operating Agreement shows the court that you have a legitimate, organized business. Without it, the court may consider your business a sole proprietorship which means you and the business are one and the same and thus make your personal assets at risk.
Per the IRS, LLC's are typically taxed as a sole proprietorship or partnership. LLC's do not pay income tax on the business itself; instead, the members (owners) list business profits and losses on their personal tax returns. You can also elect to be taxed as an S-corporation. If your LLC is already incorporated, you can change your tax election to an S-corp (or vice versa). The current year's election change to an S-corp has passed (March 15, 2019), but you can still make the election which will automatically take effect January 1, 2020.
Do You Need an LLC?
If your business faces a reasonable risk of lawsuits or if the business debt is a possibility, you may want to consider an LLC to protect your personal assets. For example, if you open a self-serve froyo shop, your liability insurance may not fully protect you if a customer sues after he slips on a spout that was left open and melted froyo covers the floor.
It only takes one person to form an LLC and is referred to as a Single-member LLC. Most states do cap the number of members an LLC can have, but typically it's 100 members, so I doubt most of us would ever reach that cap. Should you want to add or remove members, you can easily do this by filing with the state, there is no need to dissolve or anything of that drastic nature.
However, there are certain businesses that cannot form as an LLC such as a bank, trust, or insurance industry businesses. Some states also prohibit architects, accountants, doctors and licensed healthcare workers from forming LLCs.
Can't I just incorporate my business myself and not have to pay someone?
Yes. Is it a good idea? No - not if you are incorporating as an entity other than a Sole-proprietor. The top 3 most important items when incorporating as an LLC (and anything other than an SP) is your companies legal documents. (Articles/Bylaws/Operating Agreement) As mentioned above if you make a mistake in the legal content in those documents you've opened yourself up to personal assets being at risk and potential state and federal fines. You would think that when you file those forms with the state that they would do some type of review to make sure everything is compliant, but they don't. They look for a few key items such as the business name, the member's names and the required signatures and that is it.
Be sure to leave comments or questions so that I can address them in the follow up post!
If you're starting a business and want to form an LLC, Washburn's Consulting can help. Click here to schedule a free consultation.
**The above is not legal or tax advice. This content is for education purposes only. This content does not imply a consultant-client relationship.